Thrifty Thinking: Common Investing Mistakes

“Letting Yourself Get in the Way” is just one of the five biggest mistakes investors make when it comes to their portfolios, according to Peter Mallouk, JD, MBA, CFP.
 
Mallouk has been rated the #1 Independent Financial Advisor in America by Barron’s in 2013 and his company, the #1 Independent Wealth Management Firm in America by CNBC in 2014.
 
His new book, The 5 Mistakes Every Investor Makes and How to Avoid Them (Wiley, August 2014) reveals the common and critical mistakes that investors make, why they make them and how to avoid to them. After understanding these land minds and pitfalls he provides a sensible framework for creating a winning investment portfolio with a step-by-step 10-point plan.
  
How do we get in our own way? Too many investors make emotionally driven mistakes when it comes to investing. The key is to recognize behavioral biases so that you can knowingly protect yourself. Be on the lookout for:
 
-- Confirmation Bias: People have a tendency to look for and favor information that confirms their preconceptions and beliefs and to avoid, devalue, or dismiss information that conflicts with their beliefs. One way to deal with this bias is to ask yourself everything that can wrong. This forces your brain to go through the exercise of acknowledging or even welcoming adverse ideas.
 
-- Anchoring: There is a tendency for us to over-rely on the first piece of information that enters our brain – the anchor. Once this anchor is set, all future decisions revolve around the anchor, contaminating rational thinking. With a heightened sense of awareness of this bias, you can avoid holding losers too long and selling winners too soon.
 
-- Loss Aversion: This is the bias humans have to avoid a loss rather than make a gain. We fear losing more than we enjoy winning. This is the reason investors sit in cash, despite knowing full well that they are purposefully and willfully losing the purchasing power of their money.
 
-- Mental Accounting: This is how an individual will divide his current and future assets into separate, nontransferable portions. If you hold separate accounts, keep in mind they should not be judged individually, but rather as to whether they contribute appropriately to your long-term objective.
 
-- Recency Bias: This is the tendency to project one’s most recent experiences or observations into the future. The mental shortcut lets us make predictions about what will happen in the future based on what happened in the recent past. To combat this, follow a disciplined system for managing your money based on process rather than on recent market events.
 
-- Negativity Bias: This is the nature of humans to recall negative experiences more vividly than positive ones, and therefore act consciously and subconsciously to avoid negative experiences. This is particularly dangerous when there are recent events that make it more acute. As with all behavioral biases, be aware, recognize it, and squash it before it impacts your portfolio.’
 
-- The Gambler: We all have a subconscious desire to gamble inside us, but can we control it? Endorphins go crazy when we are winning. Human psychology also encourages us to keep playing when we are losing because we want to feel good again. The market is just as unforgiving as the house in Vegas. The odds are not in your favor.
 
-- Fear, Greed, and Herding: Rather than be fearful and sell out at the worst time or get greedy when the market is way up, investors should control their emotions. Don’t follow the crowd. Suffocate these instincts that want to make you a bad investors.
 
-- Overconfidence: Don’t overestimate your ability to get something right. No one can time the market. This can result in some rather poor decision making in life and in investing.
 
 
ABOUT THE AUTHOR
PETER MALLOUK, JD, MBA, CFP, is the President and Chief Investment Officer or Creative Planning and affiliated companies. Mallouk’s companies provide comprehensive wealth management services to their clients, including investment management, financial planning, charitable planning, retirement plan consulting, and tax and estate planning services. He has been named the #1 independent financial advisor in America on Barron’s list and his company has been named the #1 independent wealth management firm in America by CNBC. He lives in Kansas City.